"Can you spot me a fiver?” This may seem like a crazy question to put to one of your biggest customers, but maybe it’s a question you should be asking. In the current economic climate, the old saying “cash is king” has never been so true.
Big, medium and small businesses alike are looking at their cash and working capital positions as a point of survival and/or competitive advantage. Big businesses such as supermarkets have a tendency to look for quick wins to keep their shareholders happy and, when it comes to cash management, many are looking to extend payment terms with their suppliers as a kneejerk reaction. This thinking is very short-term and doomed to failure.
With financial institutions limiting their lending, many suppliers are already at breaking point or have folded as they have failed to secure bridging loans or competitive credit rates to bolster their own working capital. Some suppliers have been forced to sell their invoices on to a third party (known as factoring), which may fill the financial hole temporarily but the impact on margins can be so severe that insolvency becomes the only option.
Not surprisingly, those suppliers that are able to borrow money face costs in doing so, which inevitably come back to the customer as price increases. As a result, the initial move by purchasers to improve their cash position is negated by an increase in price. And if there’s one thing supermarkets don’t like, it’s increases in costs from suppliers.
Some of the more forward-thinking businesses understand this circle of events and are taking this into account when evaluating their supplier costs. It is these more insightful companies that have realised that instead of pushing to extend payment terms they can actually support both themselves and their suppliers by offering Supply Chain Finance.
SCF is a unique, buyer-led programme, facilitated by a third-party financial institution that creates a win-win situation with a wide range of benefits. In essence, it enables suppliers to get paid earlier, often through cheaper credit, while the buyer is able to pay later. Suppliers are able to receive their payments early by leveraging the buyer’s good credit rating.
This is a critical point – a bank is always going to be more willing to offer funds to an organisation such as Tesco than one of its suppliers, due to its robust credit rating. It is this shift of emphasis from supplier to buyer that could be the key to economic recovery: banks still trust large retailers, but their nerves are frayed when it comes to supporting smaller suppliers.
In the past month Sainsbury's has announced that it has appointed RBS to manage its SCF programme. This is a strong endorsement and will help the chain shore up its supply chain and free up working capital for itself and its suppliers. This much needed liquidity will help its suppliers to weather the recession.
Sainsbury's is leading the charge in terms of SCF in the food & drink industry but the problem for many suppliers will be that not all of their large customers will be aware of this model. As such, it might take a couple of forward-thinking suppliers to ask the question “Why don’t you offer Supply Chain Finance?” As such, the question “can you spot me a fiver?” might not be such a crazy question to ask.
Mark Perera is CEO of the Procurement Intelligence Unit.